Signature Loans

Characteristics of Signature Loans

Signature loans – so called because they are disbursed on the strength of a signature – are also called good faith loans or character loans. It is easy to see that the nomenclature comes from the fact that the loan is sanctioned simply on good faith and good will of the borrower. The characteristics of signature loans are as under –

• They are granted purely on the strength of the creditworthiness of the borrower
• No collateral or other security is required
• The loan amount may be utilized for any unspecified purpose
• Limits on loan amount and interest vary from one lender to another.
• The creditworthiness is an important factor in determining eligibility, loan amount, and interest rate.
• Interest rates on signature loans are comparatively high, as the lender has no collateral or security.

Some lenders grant signature loans based on digital signature. These loans are popular in western countries; however, they are not so well known in India.

How are Signature Loans evaluated?

When a borrower approaches a lender for a signature loan, the lender will evaluate the following factors –

• The borrowers income
• The borrowers employment status
• The borrowers history of loans and credit
• The borrowers history of bankruptcy
• The borrower’s credit score and rating

Each lender has their own terms for granting signature loans. In addition, each application for signature loan must be decided on individual merit.

Eligibility Criteria for Signature Loans

Documents required to apply for Signature Loans

Lenders usually demand the following documents for signature loans –

1. Standard KYC documents – these include proof of residence, proof of identity, and proof of age.

2. Proof of Income – this may include salary slips, profit and loss statements, bank account statements, and income tax returns.

The following documents may be submitted as KYC (Know Your Customer) for signature loans –

• Aadhar Card
• PAN card
• Ration Card
• Passport
• Driving License
• Voter ID card

In addition to the above, many lenders offering signature loans may demand some other documents such as past credit card or debit card bills, documentation with respect to earlier loans, and so forth, depending on the amount of loan, and credibility of the borrower with the institution.

In case there is a co-signee, KYC and other documents of the co-signee will also have to be submitted.

Once again, every lender has their own procedure and requirement. Please visit the website or office of the lender for detailed information.

Fees and Charges Associated with Signature Loans

Many lenders charge a processing fee – as a percentage of the loan amount – for completing the loan process. A documentation fee may also be charged either in lieu of or in addition to the processing fee. Similarly, penalty may be applied in case of delayed EMI payment, bouncing of EMI check, or pre-closure of loan.

What can I use my signature loan for?

If you are an individual with a good social standing and have maintained a good credit history, you may be eligible for a signature loan. Most lenders do not specify the purpose of a signature loan other than to state that it can be used as a personal loan for any purpose.

Some of the uses of signature loans include -

• For debt consolidation
• For home renovation or redecoration
• For paying credit card dues
• For purchasing a two-wheeler, etc.
• For vacation expenses
• For wedding expenses
• For your or your child’s higher education expenses

Consequences of default in repayment of Signature Loans

While signature loans are granted on the strength of the credibility of the borrower, this does not mean that the lender is not concerned about repayment of loan. On the contrary, the lender is even more concerned since he has no collateral asset that he can repossess to recover the loan from defaulters. For this reason, lenders carefully lay down the terms in case of default. As well, there may be personal consequences of not repaying the signature loan in a timely manner.

Some of the consequences of non-repayment of signature loan include –

Penalties

Borrowers may be penalized in case they fail to pay EMI on time, the EMI check is returned un-cleared – bounces –, they fail to make payment of more than 2 EMI, or they stop making payment of EMI altogether. The penalty applied is usually expressed as a percentage of the loan although some lenders may specify fixed penalty based on loan amount.

Penalty may also be applied by some lenders in the event the borrower wishes to make complete repayment in advance and close the loan amount. This is because, when the lenders compute the loan and EMI amounts, they consider certain factors. When the loan is repaid in advance, their computations change requiring them to make certain adjustments. Also, the lender will suffer a loss of interest for the remainder of the term. Therefore, many lenders apply penalty if the loan is prepaid.

Negative impact on credit rating

When individuals or businesses apply for loans, one of the factors taken into account for eligibility is the borrowers past repayment history. If the borrower has been habitually defaulting repayment of loan, this fact will reflect on his credit rating and score, making it difficult for him to get a loan in future.